Is the US government causing the chip shortage?

By Scott Sumner.

"There’s a lot of discussion about how the computer chip shortage is causing problems for US manufacturers. But I rarely see any plausible explanations of why there is a chip shortage.

Articles on the subject occasionally mention the fact that auto producers did not order enough chips. But why should a reduced supply of chips cause a shortage? In the standard supply and demand model, a reduction in supply does not cause a shortage; it causes higher prices. I am still able to buy apples at the grocery store when there’s an unusually small apple crop; it’s just that the price is higher than usual. Why doesn’t that apply to computer chips?

There could be many reasons, but I suspect one factor is that chip manufacturers and/or wholesalers fear political retaliation if they raise chip prices to market clearing levels:

(Bloomberg) — The Biden administration has concluded that a global semiconductor shortage will persist until at least the second half of this year, promising long-term strain on a range of U.S. businesses including automakers and the consumer electronics industry.

U.S. officials plan to investigate claims of possible price gouging for chips used by auto and medical device manufacturers, Commerce Secretary Gina Raimondo said Tuesday.

Of course formal price controls are very bad. But laws against price gouging are equally bad. Even cultural norms against price gouging are bad. Price gouging is necessary for markets to do their job when there is a steep fall in supply or a steep increase in demand.

Foes of price gouging often assume that it’s a zero sum game. In fact, price gouging serves two important roles. First, it boosts quantity supplied. Supply is almost never completely inelastic over a period of several months or years. Second, it leads to the limited supply being allocated to those who place the highest value on the good.

Why don’t farmers get accused of price gouging?  One theory I’ve heard is that the public (and hence politicians) tends to sympathize with producers that appear in children’s stories.  Hence politicians favor farmers, teachers, fireman, police, etc."